In a speech delivered today to the FICC Markets Standards Board (FMSB) in London, Mark Carney, Governor of the Bank of England (BoE), expressed optimism that new measures aimed at preventing misconduct in the FICC markets are having a significant impact.
These measures, set out two-and-a-half years ago in the Fair and Effective Markets Review (FEMR), are designed to improve confidence in FICC markets after a series of scandals.
“Multiple factors contributed to a tide of ethical drift in FICC markets. Market standards were poorly understood, often ignored and always lacked teeth. Too many participants neither felt responsible for the system nor recognised the full impact of their actions. Bad behaviour went unchecked, proliferated and eventually became the norm,” noted Carney in his speech.
One of the ways that authorities have sought to improve behaviour in the FX market specifically is through the Global Code of Conduct, of which the final and complete text was released in May.
However, as Carney pointed out: “We know from history that codes are of little use if nobody reads, follows or enforces them.”
He added that, “given the long history of misconduct, aren’t such efforts akin to King Canute rebuking the waves?”
In answer to this rhetorical question, Carney expressed optimism that the work being undertaken to improve these markets will have a significant impact, because they are mutually reinforcing. Specifically, he highlighted four changes that are having a practical impact on behaviour in the FICC markets.
Firstly, Carney pointed out that the FMSB now convenes senior participants from 50 global issuers, underwriters, asset managers, exchanges, custodians and investment banks to help them codify best practices in a way that complements and enforces existing regulation.
“The breadth and engagement of the membership gives its standards credibility and creates peer pressure within the industry to promote adherence,” he said.
Secondly, Carney claimed that peer pressure within firms will help reinforce the standards being promoted in FICC markets.
He added: “Most banks have codes of ethics or business principles. These are necessary but not sufficient, not least because it isn’t reasonable to expect every trader to absorb their meaning or to translate them readily into live situations. But it is reasonable to expect them to use FMSB guidance to help recognise the differences between a real market and a rigged one. And it is essential that business cultures encourage everyone to call out market abuse when it occurs.”
Thirdly, Carney pointed out that it is becoming easier for buy side firms to apply pressure for firms to behave in a proper manner because they can now point to clear, practical standards
The most obvious example of this, he said, is the FX Global Code, where major central banks – including the BoE – have confirmed that they intend to adhere to the principles of the Code, and that they also expect their regular FX counterparties to as well.
Fourthly, Carney said that “the combination of new arrangements for compensation, the expectations of the Senior Managers Regime (SMR), regulation and market standards are mutually reinforcing”.
In particular, he argued that the SMR gives teeth to voluntary codes by incentivising senior management figures at financial firms to develop, adopt and embed them.
“By requiring identification of the most senior decision-makers of banks, insurers and major investment firms, and setting requirements on them, the SMR re-establishes the link between seniority and accountability, strengthens individual accountability, and reinforces collective responsibility,” said Carney.
He continued: “Senior managers can now be held individually accountable if they fail to take reasonable steps (including training or proper oversight) to prevent or stop regulatory breaches in their areas of responsibility. The SMR prescribes individual responsibilities – typically to the Chair and CEO, respectively – for developing and embedding a firm’s culture, alongside a collective responsibility for the Board.”
Interestingly, Carney commented that, over time, market codes may become “more firmly embedded still” in the SMR, a subject that he said the Financial Conduct Authority (FCA) is currently consulting on.
The reason why this could be significant is that central bank authorities have repeatedly emphasised that the FX Global Code is voluntary and therefore does not have the status of regulation. But if the Code is formally embedded into the SMR, this could raise questions about the extent to which it might then become de facto regulation with penalties for not complying.
Carney rounded off his speech by stating: “The mutually reinforcing relationship between the regulatory framework and market good practice should help the FMSB, and other market standard-setters, maintain their ambition and momentum even once memories of post-crisis misconduct fade. It could sharpen collective incentives to address, more conclusively, outstanding ambiguities that act as obstacles to real markets. And it should help mitigate emerging vulnerabilities.”